3 Contrarian Buy Calls, 2 To Sell For Technology Stocks

by: Chris Lau

As technology stocks pulled back last week for the first time this year, earnings reports moving share prices the most were for companies with the biggest surprises. These companies also traded at well- above the average daily volume. By looking more closely at the earnings results for these companies, a contrarian play offers most upside. It will be shown that two technology stocks should be avoided, and two should be bought. Nuance Communications (NASDAQ:NUAN) and Groupon (NASDAQ:GRPN) are stocks to avoid, while OmniVision (NASDAQ:OVTI), Riverbed Technologies (NASDAQ:RVBD) and Alcatel-Lucent (ALU) are stocks to buy.

(1) Nuance Communications - Sell

Nuance investors could ask OmniVision shareholders about what it's like to be an Apple supplier. Nuance shares traded as low as $16 last August 2011, only to double since then to $26.50. Shares sold off 12.99% on Friday February 10 when it reported results that were below investor expectations.

Nuance is getting goodwill value from greater awareness for voice-recognition through Apple's Siri, but it is not helping earnings as high as previously though. Nuance still trades at lofty price multiples, owed in part to optimism for Apple's (NASDAQ:AAPL) use of "Siri." During its conference call, Nuance said that earnings from "Siri" would be spread out over a number of quarters:

"We see some revenues early and then the remainder of the revenues spread out over the period of contract associated with the completion of engineering services, the delivery of network-based services and royalties associated with volumes, as well as some other factors."

In summary, the company reported:

  • Non-GAAP revenue of $382 million
  • Non-GAAP earnings of 34 cents a share

Nuance forecast the following:

  • Non-GAAP $395 million to $415 million revenue for Q2
  • Non-GAAP earnings per share of $0.36 0 $0.40 for Q2
  • Non-GAAP $1.66 billion o $1.71 billion revenue for 2012
  • Non-GAAP earnings per share of $1.55 to $1.62 a share

The company offers shareholder a diversified source for revenue by operating in health care, mobility, imaging, and enterprise. This reduces reliance on Apple for revenue growth, but suggests that investors should not be raising price multiples in this company. Strong iPhone sales will not necessarily translate to higher profits. Further, Nuance's pending acquisition for Vlingo (an application that was given away to Blackberry users after RIM's outage) will only be a small contributor to March's quarterly earnings.

(2) OmniVision - Buy

OmniVision did not report earnings yet, but its share movement requires closer examination in light of the sell-off in Nuance shares. OmniVision already gave an earnings warning last quarter, and share plunged after results suggested that the company would not be a camera sensor supplier for Apple. In that time, selling pressure dropped as shares bottomed at $10.15. With after tax-loss selling ending in December, investors continue to bid shares up in the absence of negative pressure. OmniVision shares rallied back 52% from its 52-week low to $15.69. The company is scheduled to report earnings on February 23, after market-close. Investors should be starting or holding a position in OmniVision.

(3) Riverbed Technology - Buy

Like Nuance Communications, Riverbed lowered its short-term forecast, sending shares down as low as $22.93 on the day. Shares rebounded recently, closing at $27.55. The company is still a buy, not a sell, for investors with a long-term time horizon. The company said that it is delivering new Steelhead appliances this year. The company still has a moat: its Steelhead and Cascade product makes RiverBed the only vendor to provide a deep integration between WAN optimization and a network performance management solution.

During the quarter, the company reported $41M in net income ($0.25 per share). For the full year, net income grew 62%. With earnings of $150 million or $0.90 per diluted share, Riverbed has a P/E of 30.61.

Two risks remain: first is the 35 Day sales outstanding (compared to 33 in Q3) are a concern and second, a risk in sales growth execution from new product launches in 2012. Riverbed shares might pull-back in the near-term to $25-range as traders lock profit. This would be a good entry point for investors to buy Riverbed.

(4) Alcatel-Lucent - Buy

Alcatel-Lucent surprised investors when the company reported stronger-than-expected earnings. During its conference call, the company said that it would find ways to monetize its portfolio of 29,000 patents, benefit from the industry's move towards LTE, and to keep trimming its costs. In the last three years, the company cut fixed-costs by EUR 1 billion.

With continued focus on mobility and the cloud, Alcatel-Lucent said that it was confident for 2012. The company said that it would be able to achieve higher margins and have a higher cash balance at the end of this year.

For the quarter, the company reported an improving cash flow of EUR 541 million, 40% higher than the EUR 360 million from the previous period.

(5) Groupon - Sell

In the social media space, Groupon reported weak results, unlike LinkedIn (NYSE:LNKD), which rose nearly 20% on strong results to justify its valuation. Groupon closed recently at $19.45 after trading as high as $25.59 before reporting its quarterly results. Groupon forecast revenue growth of just 5% in the current quarter. The company hired workers and spent heavily on advertising to grow its subscription base, now at 33 million. This will pressure margins. Despite bullish calls by analysts for Groupon, investors should instead be selling shares whenever the stock rallies.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ALU, RVBD over the next 72 hours.